By Danny Newman
The Eighth Circuit recently weighed in on the issue of how to determine appropriate cramdown interest rates for secured creditors in Chapter 11 bankruptcy plans under Section 1129 of the Bankruptcy Code. In In re Topp, the court ruled that the Treasury bill rate, not necessarily prime, can serve as the starting point in applying the “formula approach” first outlined by the Supreme Court in Till v. SCS Credit Corp. for Chapter 13 bankruptcies. The Topp decision adds to growing case law supporting flexibility in calculating cramdown rates. This increased flexibility opens the door for debtors to argue for lower cramdown rates, especially in jurisdictions like the Ninth Circuit where there is limited binding precedent.
Background on Calculating Cramdown Rates
In the 2004 Till Case, the Supreme Court established a “formula” approach for determining cramdown interest rates in Chapter 13 cases. This involves starting with a base risk-free rate, like the prime rate, and adjusting upwards to account for the debtor’s default risk. The Till court presumed the prime rate as the starting point but acknowledged it is not entirely risk-free, thus considered a risk-premium add-on as appropriate. Most courts have since adopted a two-step process for Chapter 11 cramdown rates: first look to an efficient market rate if available, and if not, apply the Till formula.
The Topp Decision
In Topp, the Eighth Circuit held that Till does not mandate using the prime rate as the starting point for the formula approach, joining the Fifth Circuit in holding that the prime rate plus a risk factor is at least not the only way cramdown interest rate can be determined. In re Texas Grand Prairie Hotel Realty, LLC, held that the formula approach established in Till is not the exclusive mechanism to determine the appropriate interest rate, but applied Till’s formula approach, where parties had agreed such approach governed. The Topp court focused on the 20-year proposed repayment period, the creditor’s oversecured claim, and the overall risk of nonpayment in approving a 4% cramdown rate using the lower Treasury bill rate plus a 2% risk adjustment.
Importantly, the Eighth Circuit found the key factor is not the specific starting rate, but properly accounting for the risk the creditor may not get paid based on the debtor’s circumstances. This adds flexibility, as it opens the door for courts to potentially approve cramdown rates using either the Treasury rate plus uncertainty, the prime rate without an add-on, or even some other rate offered by the debtor that properly accounts for the lender’s risk of nonpayment.
The Impact of Expanding Approaches to Calculating Cramdown Rates for Debtors and Lenders in the Ninth Circuit
With prime rates rising, the ability to use a lower Treasury rate as the starting point for cramdown calculations could result in lower interest rates than typically expected. This expanded flexibility creates an opportunity for debtors to argue for rates departing from the common practice of prime plus a risk premium. If courts approve lower cramdown rates, it could incentivize more Chapter 11 bankruptcy filings because the ultimate exit financing would be cheaper than under current practice.
The Ninth Circuit lacks definitive binding precedent on calculating cramdown rates under Chapter 11. Although the common practice has been to use the prime rate plus a risk factor, the correct rate is technically an open question. The Topp decision now provides direct, persuasive authority for debtors to argue for cramdown rates in the Ninth Circuit using the lower Treasury rate or prime without an add-on.
Each case will involve a fact-intensive analysis to determine the appropriate rate, with courts likely to consider factors such as repayment feasibility, security value, creditor recovery prospects, and post-emergence risk profile. The Topp ruling serves as a reminder for debtors to carefully evaluate the required evidence to support cramdown rate proposals that depart from the common practice.
This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about the issues raised here, please contact Danny Newman or the attorney with whom you normally consult.